Real Estate / Refinance Boom Ending - What Now George ???

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Real Estate Boom Continuing Full Speed Ahead Despite Busted Economy - Protracted Disaster Lurks ...

I don't know about other areas in the country, but in the San Francisco Bay Area, real estate is booming despite the busted economy. Of the 2.6 Million jobs lost in America since 2000, over 1 Million of them lost were right here in California. Nonetheless, home sales are moving among record price levels.

The article below ...
"Stocks Rise on 2 Positive Economic Reports" attributes the whopping real estate market, along with improved consumer confidence as driving forces in Stock Market Increases and Strength.

http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Then, in a seemingly schizophrenic manner, another article, with another message. "A Sickly Economy, With No Cure in Sight" pointing out the problems involved for a long haul recovery.

http://www.nytimes.com/2003/05/25/weekinreview/25LEON.html

Now, I was in Real Estate actively for 8 years, 5 of them being the owner of my own Real Estate Brokerage in Alameda, California.

I've watched three major swings from boom to bust and back over the past 30 years. Each time the swing has become more radical ... at least here in Ca. Can't speak for your area of the country.

Here is what I see ... record low interest rates have resulted in record high price levels because the debt service at these bottom rates make the loans supportable. Once the rates increase, the debt service increases from the supportable to the obscene.

Friend of mine just bought a 3 bedroom 2 bath condo with a two car garage ... upper to medium middle class neighborhood in Mill Valley, Ca. He paid $575,000. Sold off some stock he inherited, enough to pay 25% down to a loan of 431,000. First 5 years monthly payments paid at 4.75 interest only netting roughly $1,700 per month. Taxes are $500 per month, Condo monthly fees of $250. I have no idea about homeowners insurance, but we'll ignore that just for chuckles. Total payment ... $2,450 per month ... cheap for here!

Now ... In five years, it reverts to a 30 year loan at whatever the current rate is. A modest increase of 2% interest rate, and then, of course, the principal payment pop's this cheap payment to 3,350. per month.

Do the math, we're buying at prices reflecting an unrealistic overall interest rate and an inflated sale price. Interest rate increases quickly destroy market value.

Once the interest rates return to normalcy, how long do you think it will take the pricing structure to normalize ?? Based on previous booms and busts, I'm betting 6-8 years, and that is optimistic. Picture a dead real estate market for 6-8 years with a huge drop in new starts bringing construction to a halt. This isn't speculation, it has happened many times before. What will we count on then to spur our economy ... consumer confidence??

Anon

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Hmmm.. I'm certianly no expert here but in this area (greater Boston) the rise in housing costs leveled as the interest rates dropped and have seen a very slight drop in just the last month or two. Most of the decreases have been in rental costs though, not sale prices.

The majority of the really low interest loans went to homeowners who were refinancing their existing homes though, not new buyers. In those cases they aren't taking on new debt load, they are reducing their existsing debt load due to the lower rates. I would think that would be a good thing in the overall market.

In the case you cited it seems your friend was foolish and went with an ARM (maybe there was some other reason he/she chose this... ???). With fixed rate 30-year fixed rate loans at record low rates why take the risk? If they had converted to a 30 year fixed rate while the rates were down in the 5.75% rate they would have had stable monthly payments.

But, to your main point.. Well, who knows??? The housing market collapsed in CT back in the mid-1990s and it never completely recovered even to today. I have a house in OK that has been on the market now for 3 years and I still can't unload it because the area was over-built with to many new houses for the market area. Housing markets seem to be exceptionally regional which makes predicting anything with them a major PITA (as I'm sure you know! Wink

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I've been house shopping for about 6 months. Here in Mass the prices have dropped. A home that would have gone to market at $400,000 and sold for that is now going to market at $370,000 and selling at about $350,000. That's in the Greater Boston area.

It's not great - $350,000 - $330,000 for a small 2 bedroom cape at the moment within the 128 loop, but it's better than what we were looking at before. Either way, at a combined income of $90,000 a year, we still end up spending half our monthly income on a mortgage for a small 2 bedroom cape while trying to keep out work commute to under and hour and a half each way.

Needless to say, I'm a bit sick to my stomach over the whole thing.

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Oho! At last I understand PITA. Thanks fishin'.

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fishin' wrote:

Hmmm.. I'm certianly no expert here but in this area (greater Boston) the rise in housing costs leveled as the interest rates dropped and have seen a very slight drop in just the last month or two. Most of the decreases have been in rental costs though, not sale prices.

Not here Mr. Fish! Property values have been jumping 20-25% annually. Home sales have been soaring in spite of the job losses, income loss, lower incomes ... literally against all logic!! One of the main reasons that people CAN support these prices levels is due to the rock bottom interest rates. Housing starts here had been dynamic! I actually started seeing the edge come off last November. That's when JayBea and I put the Tiburon House on the market and cashed out in December. I knew this would be coming, I just wasn't sure how fast. That's when we bought this Oceanfront property in Timber Cove, Ca. Funny enough, it had been on the market for over a year, and we got 3 acres on the Ocean at a very good price. The house needed work, but that was no problem for us because we wanted to put our own imprint on it anyway!

fishin' wrote:

The majority of the really low interest loans went to homeowners who were refinancing their existing homes though, not new buyers. In those cases they aren't taking on new debt load, they are reducing their existsing debt load due to the lower rates. I would think that would be a good thing in the overall market.

Of course it has been a good thing! It's what has kept the economy afloat! That is quite the point! Obviously the low interest rates have been a huge boon for existing mortgage holders at higher rates. Not only were payments slashed, money from the refinances was pumped back into the economy. That is one of the main reasons the consumer has been able to carry the economy on their backs!! However, here in California, it has not only been the refi's that have been active, but also the home purchases. Construction loans, home addons, etc.

fishin' wrote:

In the case you cited it seems your friend was foolish and went with an ARM (maybe there was some other reason he/she chose this... ???). With fixed rate 30-year fixed rate loans at record low rates why take the risk? If they had converted to a 30 year fixed rate while the rates were down in the 5.75% rate they would have had stable monthly payments.

No, he wasn't foolish inasmuch as he was able to buy a property that was otherwise way over his head. If the prices continue to jump 20-25% per year, you'll think he ia a genius. Problem is, he has bet the wrong direction. This is my point, and the news is now coming out that supports my viewpoint. Property here wasn't static, like in Boston!